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Business Environment

Paper Outline:

Main Supply and Demand factors that have affected food prices during 2010 and 2011
Factors that have dictated food prices in Malawi
Effects of Rising Food Prices on Consumers and Governments and the Governments interventions
Reasons behind my forecast for an increase in oil prices in 2011
Impacts on the UK of holding the Olympic Games in London in 2012
Criticism of Companies Enjoying Monopoly Powers
Specific Policies Introduced by the Kenyan Government to prevent Monopolistic Practices.


Main Supply and Demand factors that have affected food prices during 2010 and 2011
The period during 2010 and 2011 has witnessed a trend of rising food prices, overall on all foods dominating the global economy such as wheat and barley as well as maize. Many factors have been attributed to be the cause of the rising food prices in the global market. First of all, there are supply factors that have led supply of food in the global market to decrease thus increasing the prices of the respective foods. These supply factors include an increase in cost of production which was mainly as a result of an increase in the price of a single major component of modern food production, and that is fuel price. Fertilizers are made from fossils fuels and they are used on a very large scale in modern farming, secondly fuel is used in the transportation of fertilizers and other materials to the farm as well as the harvested food from the farm to the processing factory or the market (Blatt 2008, p. 44). As a result, a sharp increase in fuel price as witnessed during 2010 and 2011 causes a drop in global food supply.
Another factor that has led to an increase in prices due to reduced supply has been the technology change that has created a new demand for biofuels, made especially from corn. Increased demand for using farms field to grow biofuels instead of food has caused a dramatic drop is land available for food production (Braun 2007). As global focus turns to climate change and the need to use renewable sources of energy, biofuel demand has increased, at a cost to the availability of adequate agricultural land for food production. However biofuels are yet to consume a significant amount of land otherwise used to grow food. Increased investment in biofuels also improved the overall farming technology (eds. Khanna, Scheffran & Zilberman 2010). Supply expectations have also greatly affected prices as suppliers position themselves to cushion against surpluses. As most developed economies faced a credit crunch, consumer disposable incomes reduced and most suppliers reduced their purchase agreement quantities of food with farmers, because they anticipated a decrease in demand caused by the economic meltdown. This move by suppliers also caused farmers to decrease their production so that they are not left with surplus that will require the farmer to incur an extra cost of storage. Lastly unfavourable weather in the parts of Russia caused a significant drop in the global wheat supply, and since the country is a major supplier of wheat to the world, the shortage was felt in the world market, this shortage was magnified by government policies of various states that prohibited or controlled export of cereals especially wheat from their countries. Prices that had previously risen due to increased fuel prices, increased further as demand became too high for supply (International Institute for Strategic Studies 2011).
Some other factors that have influenced the prices during this period are demand factors that have caused mainly an increase in demand against a consistent or diminishing supply, in markets whose prices is control by the equilibrium mechanism, thus increase in price of food. An increase in the people living in urban areas that is attributed to an increased rural to urban areas especially in developing cities, has made populations of those cities to grow much faster than the market supply of food can cope with. So the increased demand has resulted in higher food prices as traders cash in on the high demand. Actual decreases in disposable incomes of consumers led to a slump in demand at the first part of 2010 as suppliers were also shaping up to reduce their supplies. Consumers also changed their preferences due to their low incomes and increasing prices of fuel, to none processed food types and this caused a decrease in the demand for raw materials used in the processing of these foods (Kolb 2010).
Factors that have dictated food prices in Malawi
Malawi is an agricultural economy country in the southern Africa that has a high dependence rate on maize as it staple food contributing up to 57% of the calorie intake of the total population in the country. The country is generally self-sufficient in maize with an occasional annual import and export of 6% of the total production. In the recent years since the government intervention of 2006, the country has had surpluses in maize and the government has offered government-to-government exports of maize to its neighbour facing shortages. Despite having realised surpluses in maize output, over the last few years, Malawi does not actively trade its grains in the international market. Other than maize, other staple foods in Malawi are cassava and plantains (COMESA 2010).
Local grain prices have been volatile mainly as a result of unpredictability of supply. Most of grain consumers in the country are poor and therefore instantly feel even the slightest change in prices of grains such as maize which is the staple food. Since the poor make up a large majority of the population, they serve as a big political constituency and make food price issues the heart of politics in the county. Therefore, the government is highly involved in determining the domestic prices of grains. Maize is the most traded grain in the domestic market and its price reflects the food business environment in the country. The following are the factors that have affected the grain price of the Malawian domestic market in the last several years.
The Malawian government has stepped in to regulate market prices of staple foods such as maize. This has mainly been due to political reasons where politicians do not want to lose favour with their voters by advocating for a market determination of prices that in greatly affected by spatial and temporal variations. Malawi is the only country pursuing price stabilisation that has been able to meet food supply objectives (COMESA 2010). This has been made possible by the government commitment to improve infrastructure linking two trade cities of Lilongwe and Blantyre thus boosting domestic trade and ensuring that surpluses in an area are fast moved to other areas experiencing shortages. This has in effect served the political goal of maintaining low prices across the country while ensuring that there is adequate supply. The government has also gone ahead and provided farmers with subsidised fertilizer in puts to so that their production costs remain low. Tight control of the import market through tariffs and other non-tariff barriers have also assisted the government to stabilize staple food supplies in the country. The graph below verifies that export trade in the last few years has been very low (Tribe 2010).
Even though the cost of portion was greatly lowered by the government decision to subsidise fertilizer inputs, rising fuel prices have increased the cost of transportation of these inputs to farmers, as well as the farm running costs and transportation of harvests to storage areas and markets. Retail suppliers and other distributors have directly influenced price although they have a restriction to the amount of direct costs that they can pass to consumers, therefore to cushion themselves, they have offered lower prices to farmers, as well as engage in speculative activities of buying and holding which have resulted in temporal variations on the supply of staple foods, and increased the volatility of the domestic market price.
Spatial variations in staple food supply occur when traders for their own profit interest move food from area of low demand to those of high demand. Therefore such suppliers serve as price buffers indirectly ensuring that domestic prices remain stable. As the government improves infrastructure like roads and with the additional good investment climate that allows private investors to thrive, cost of production are lowering such that effects of rising fuel prices are buffered. Increased mobile phone penetration is also aiding communication and makes the domestic market more transparent as rural farmers become as informed as urban consumers and suppliers on the prevailing supply and demand levels as well as market prices (COMESA 2010). International prices of grain and subsequent transmissions of shock to the local domestic market have been limited by the government control on import and export of staple foods.
Effects of Rising Food Prices on Consumers and Governments and the Governments interventions
Rising food prices are welcome by farmers because they result to higher earnings by the farmers. However in some cases where there are middle men between the farmers and retailers of processors of their foods, high prices might not result to high higher earnings by farmers, as middlemen pocket the margins. Food prices rise when the supply of food decreases, when the effective demand for food increases or when the two afore mentioned factors occur together. The most effect of high food prices is faced by consumers because they have to dig deeper into their pockets and as a result have to be contend with having little change for purchase of other items other than food. As food prices increase, consumers are forced to decrease their quantity consumed so that their income portion meant for food stays the same. Consumers also have to forgo their favourite food brands in favour of cheaper brands that usually lack additional processing (McCure & Haytmanek 2010). For example, consumers may therefore prefer to take plain milk in place of yoghourts because milk prices have risen to reach yoghourt levels while those of yoghourt skyrocket beyond reach. As food prices rise, the consumers are presented with a challenge of working harder to earn more so as to maintain their living standards and this creates a new macro-economic problem of unemployment as suddenly the supply of labour exceeds the demand. Those in employment become under-employed.
The governments that subsidise food prices in their economies are faced with a dilemma of cutting their budgets on other sectors of the economy so as to supplement their food subsidy budget (Grosh, et.al. 2008). As costs of living increase, so do peoples unrests and demands for better pay by employers. Unrests by unions demanding higher pay is not desirable for employers because if they yield to all union’s pay rise demands, then the cost of production increases as labour is a direct cost, the manufacturers are then forced to lobby to governments for increased incentives such as tax breaks to compensate for the increased cost of production. Politically high food prices make the electorate lose confidence of their government ability to protect them and opposition leaders use this loophole to champion for the removal of the ruling political party from government. Governments therefore do all that is in their power to maintain low food prices (Shoup 2009).
The following are measurements that governments have taken to insulate their citizens from high food prices. When international prices are higher than local prices tempting suppliers to sell abroad than local, and this lowers the local supply and raises prices to correspond to those of the international market. So the government steps in and bans or imposes taxes on food exports to make them less lucrative. In cases where a country relies on food imports majorly, governments step in by providing import incentives for suppliers such as import compensation. The governments also directly subsidises food prices in the local market by compensating suppliers and coming up with directives that bind the suppliers to pass on the benefits to consumers. In most cases where domestic cost production is high and makes local production of food less lucrative, countries face annual food shortages that are then compounded by increased international food prices.
To safeguard against this scenario, governments are turning to focus on their local production capacities, increasing local food supply by offering farmers incentives and subsidising their production costs. Another long term measure that governments take is to allocate more budgetary funds into research and development of food crops that have a high productivity as well as a high resistance to diseases and drought tolerability (Chopra 2005). More governments that are bound by international trade agreements such as the World Trade organization agreement have no option but to open up their markets to international trade. This has an effect of exposing its domestic food supply to international price shocks which may lead to collapse of domestic production and over reliance of the international market. To counter this possibility, governments strengthens their local food industries and embrace liberalization of the industries after adequately modernizing them so that they operate competitively in a free market economy structure. Where the government find that local prices are still higher than international prices, options of using fiscal policy to reduce operation costs may be exercised. Finally as a long term option, governments provide the necessary infrastructure like energy, communications and transport to ensure that marketing costs do not become a huge factor in the price of food commodities.
Reasons behind my forecast for an increase in oil prices in 2011
The global oil market is going to face a supply shortage that will increase oil prices, secondly global oil demand will raise as countries increase their manufacturing and other sectors of their economy improve as the global economy fully recovers from the financial crisis of 2008/09. The global supply shortage will be as a result of the political conflicts affecting major oil producing countries of North Africa like Libya and the Middle East.
As these countries experience political unrests, their business environments become inhospitable and international oil companies that do mining in these countries are forced to exit for the sake of the safety of their workers as well as to protect their assets (CQ Researcher 2010). The Global Times reports that three Chinese State companies have halted their operations in Libya after their project sites were attacked by Libyan protestors; the China National Petroleum Corporation (CNPC) has also evacuated all its 391 Chinese employees from Libya for fear on more attacks (2011). Such conflicts also cause panic among market speculators trading crude oil in futures markets who advice their client companies to buy and hold with the anticipation that the future oil prices are going to be higher (Moosa & Al-Loughani 2006). Apart from trading companies, countries will also increase their strategic reserves as they witness more turmoil in Libya and other oil producing nations of North Africa and Middle East. This move has already been noted among Asian countries. Already China has started developing its strategic oil reserve storage facilities in the port of Tianjin. Each oil consumer country wants to avoid suffering again when oil prices become volatile as they did in 2008 (Durden 2011). Such moves increase the demand of oil in the current year and given the time lag necessary for an oil production increase, prices will definitely increase in 2011.
Another factor that will contribute to a higher oil price is the cost of new drillings that are becoming deeper than previous ones as oil exploration moves to non-tradition areas that require use of costly technology. Seidler (2011)reports that even though more international companies are making haste to set shop at the arctic and develop oil fields, US geologist have warned that such a move to develop the vast reserves will be much expensive than it was previously thought as the initial ideas were mooted. The region is estimated to hold up to 1.3 litres of oil. To make this forecast, I have relied on the data from the oil price trend in recent years as well as the global oil market’s reaction to similar conditions in the past.

Source: Signal Trend Inc


1/06         1/2007            1/2008           1/2009           1/2010           1/2011            1/2012            1/13
Emerging economies have recently shown an increased appetite for oil as their manufacturing sectors surge and their citizen’s move into middle class thereby buying cars and using up more energy in their houses. They create more demand for oil, whose production as explained above doesn’t instantly respond to demand. This becomes another reason for an inevitable increase in oil prices in 2011. As emerging economies add up the number of people that eat meat, demand for oil will continue to increase. This is because meat production uses up much crude oil in the production of animal feeds that include growing corn as well as processing of the meat in factories (Bittman 2008).
Besides the factors that will increase demand for oil, there are several factors that will help to hold demand for sky rocketing further. These include biofuels promotion as alternative fuels. Such promotions have been solidified by governments that have set up policies to encourage blending of crude oil fuel with biofuels in order to reduce consumer pump prices for motor oil. Other states are also moving away from using crude oil to generate electricity as they develop more renewable energy sources like geothermal power and nuclear power. An end to using thermal electricity generation is accelerated by interconnection of grid power to countries that have surplus electricity that they can export. This option also lowers cost of production in industries as cheap energy sources become available; therefore governments have one another incentive to connect their grid powers to neighbouring countries. In as much as these efforts of using renewable energy reduce the demand for crude oil, actual demand reduced is very low to significantly influence oil prices. The reduction in demand might only create spatial differences in the regions that embrace renewable energy on a large scale.
The forecast for an increase in oil prices in 2011 doesn’t escape oil producing nations in the OPEC. Each country would like to position itself well enough to maximise of foreign exchange brought about by export of oil. Few oil producing countries like Nigeria, Kuwait and the United Arab Emirates have slightly increased their production to bolster against supply shortages in Libya. The OPEC is also holding discussion on whether to significantly increase its oil production so as to level of increasing demand. The discussions have yet to be conclusive, and as it stands no significant agreement on increasing oil production has been made (San Francisco Chronicle 2011). In summing up, the year 2011 will be characterised by high fuel prices as demand grows due to revamped economies of first world countries, as well as increased consumption by new middleclass of emerging economies.
Impacts on the UK of holding the Olympic Games in London in 2012
Olympic Games will bring a lot of people to London from all over the world. These visitors will increase the demand for accommodation facilities, food and public utilities like public transport. The domestic economy of London will greatly benefit from the increased demand. This is simply because suppliers of various goods and services will increase their prices without suffering a decrease in demand. We may breakdown the actual impacts to specific sectors of the London city economy. First of all as already mentioned, increased visitors will raise the accommodation demand, and it will not be surprising to find that medium class hotels are fully booked during the games. City residents will therefore have an opportunity to earn an extra income by offering their extra rooms and spaces to sport tourists at a fee. The hospitality sector will report of increased earnings later at the end of their financial year that will be attributed to the games.
On food prices, it is expected that there will be a very slight increase as a result of increased demand. Large London retail stores have purchase agreements with their suppliers and it is expected that they will have made provisions for increased order quantities in anticipation of the increased demand brought by the games. It is not therefore likely that suppliers will be able to hold onto their products due to the anticipated increase in demand, so as to cash in on the sudden increase in demand. Restaurants will be able to raise food prices during the period, since they are not homogenous like retail stores belonging to the same company. Restaurants may capitalise on the new customer ignorance of the prices charged at other restaurants to inflate their prices. Additionally, the restaurants may introduce new dish varieties so as to cater for different people from all over the world. Households that will accommodate visitors of the game will be able to charge for the food they provide and earn a substantial profit margin to supplement their incomes in the month of the games ().
Demand for labour will rise during the preparation of the games as new facilities are built. These include new sports stadiums, an Olympic village and supporting infrastructure to these facilities. Before the games, demand increase will be on construction, design and maintenance sectors, and as games are opened, the increase in labour demand will shift to hospitality, sports assistance including guides and finally security. The short term demand increase will call for temporary employment for many of the city residents in non-traditional professions based on the needs that arise due to London hosting the games. A higher demand for labour than its supply will force the London Organizing Committee for the Olympic Games (LOCOG) to increase its pay offering so as to attract more labour that is necessary if the games are to be a success. Apart from the Olympic committee demand for labour, hotels experiencing full bookings will require extra staff to assist in providing catering services (Stevens 2008).
There will be a significant increase in money circulation in London as more people transact. Increased money supply as well as increased disposable income for households hosting games visitors will increase the demand for other products. This will mainly be goods and services of ostentation that were previously beyond the reach of ordinary city residents. For example, residents will find it easier to take taxis that are considered more expensive instead of using the metro train service to move around the city. Banks and other financial institutions will receive more deposits as their clients earn more. The increased money supply will not scale down fast as immediately after the games, demand for goods and services will fall back to original levels, and firms will be in no hurry to access their banked money for improving their businesses. In the case where firms will have borrowed funds for expansion, then at the end of the games they will be left with extra capacity (City of London n.d.).
The city local government will collect more in revenues and is likely to be the greatest beneficiary of the games. Additionally, infrastructure build for the games will remain in the city even after the games end. The improved infrastructure will make London a more favourable business environment and attract more investors into the city. Improved and new sports facilities will increase the capacity of the city to hold more events of such magnitude annually, and any event held thereafter will provide more benefits even though they may not be comparable to the Olympic Games (Blake 2005). Negative impacts of the games are also expected, although they will be over shadowed by the gains. One such impact is pollution. Being content with increased littering, and noise pollution is a price residents will have to pay. There will also be congestion on public facilities especially the metro way and a lot of productive work hours might be lost as residents miss their scheduled train rides, or face increased traffic jams and run late (Sullivan n.d.).
In summing up, the UK will economy will gain from the increased earnings from respective industries that directly benefit from the game. The benefits will mostly be in fiscal terms of high revenue collection. The UK government may be required to introduce medium term monetary policies to mop up excess liquidity of cash that might lead to price inflation after the games. However the city of London as well as its local government will receive the greatest impact (Extremera n.d.).
Criticism of Companies Enjoying Monopoly Powers
Companies enjoying monopoly powers in their markets are able to alter their production levels as well as prices charged for their products without suffering a reduction in prices as a result of decreased demand. These companies are criticized mainly because of their inefficiencies. It is argued that monopoly companies lack the incentive to be innovative in coming up with better and much faster methods of delivering their products to the market and a reduced price. Monopoly powers allow these companies to price differentiate the market and offer essentially the same product quality to different market segments at different prices. Monopolistic companies are criticised when they use their power to further hinder entry of other companies into the industry, by using their size to price cut their competitors and make them run out of business. Consumers are left with little or no surplus as monopolies charge high prices for their products.
In some cases monopoly powers are beneficial to consumers when it is necessary to have one company in an industry because more than one company will result in different standards and overlapping infrastructure. Power distribution companies are mostly monopolies because the nature of power distribution doesn’t encourage existence of more than one electricity distribution company. So is the case with water supply companies. By enjoying monopoly powers in service provision, these companies are able to guarantee employment opportunities to locals; they are free from market forces of demand and prices and therefore can be relied upon for a consistent supply of their goods and services. Monopolies when owned by government and are run well, provide a steady income that goes into filling the government’s budget financing. Large scale production made possible by monopolistic powers helps consumers to enjoy low prices. In cases where there exists a natural economy and splitting the company does not result into lower costs of production, monopolies are favoured (Baumol and Blinder 2009). Lastly, domestic economies are favoured because they are able to use their monopoly powers to compete in the international market (Pettinger 2005).
Specific Policies Introduced by the Kenyan Government to prevent Monopolistic Practices.
Kenya is a third world country that is showing tremendous progress in ensuring that monopolist does not abuse their powers. The Kenya government has embraced liberalization of some of its economic sectors to rid monopoly companies of their powers and to open price adjustments to market forces of demand and supply. This has also been accompanied by removal of barriers-to-entry that were previously making the sectors uncompetitive. Such sectors include the telecommunication sector that was previously under one state corporation (Etta & Elder 2005).
Other measures have been to privatise state companies so as to improve their efficiency and insulate them from mismanagement by politicians. The government is also establishing regulatory authorities that ensure prices charged by such companies is reflective of the competitive market rate equivalent after factoring the costs of production. The authorities also enforce regulations that ensure the production capacity of the monopolistic companies’ increases relative to increases in demand. Where the monopolistic company’s source of inefficiency was its size, the government has subdivided the company into smaller companies focusing on specific industries; For example the country’s energy generation company was split in to two companies, with the newer company tasked with the exploration of geothermal power alone. In some cases monopolistic powers still exist even after liberalization as the dominating companies in an industry have more than 70 per cent of the market share. The government has been unable to intervene in such cases so that it is not seen to be biased against one company.
Where monopolistic companies are charging more than the market price, the government has come up with its own companies to provide goods and services at market rates and discourage monopolistic tendencies of arbitrary price increases. Some industries have only one buyer of raw material and several suppliers of the raw material. To cushion the suppliers against low prices, the government offers them production subsidies as well as enforce a regulation that forces the company to buy products at above a given price (Murungi 2000).Despite the government’s interventions, some sectors of the economy still suffer under monopolist companies because the government has not set up its own companies in the sector. Secondly, the government has felt that such sectors are still in their infancy and are not yet able to support more than one company.
To further strengthen its market by encouraging as many players as possible in a given industry, the Kenyan government has come up with a proposed competition law. When passed, the law will create an autonomous competition authority that will check to see that consumer prices are not exorbitant and reduce unfair trade practices among companies in the same sector. In order to functionally operate, the authority will be having the power to enhance sanctions. The director general of the company will have the power to hire private investigators to look into monopolistic allegations. Such investigators will have the powers of seizure as they conduct investigations. Exemption powers to the competition law will rest with the authority. Finally the authority will be in charge of approving mergers within given limits (Njehu 2009), and before the coming to law of the proposed bill, the Monopolies and price commission continues to assume the role of lowering any monopolistic tendencies in the country’s economy (Karuga 2002).
In conclusion, the absolute riddance of monopolies has not happened in Kenya; however the government continues to craft policies and laws that will ensure that even companies enjoying monopolistic powers are not abusing them. All government market reforms are aimed at improving the business environment to attract more companies into the respective industries.

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